The 100 Billion Dollar Question: How to Finance the Green Climate Fund

Commentary on the potential of the Green Climate Fund and the points which remain to be addressed in the attempt to curb rising global temperatures.

Developed countries have promised to commit $100 billion a year to the new Green Climate Fund starting in 2020, first at the COP 15 (15th Conference of the Parties) in Copenhagen, and then at the COP 16 in Cancun. However, there is still no answer to a critical question: How will these commitments be financed? Although there are some recycled ideas, like a Financial Transaction Tax, revenues from CO2 emission trading, or airline taxes, these ideas still require a redistribution of existing funds or expected cash flows. Every dollar obtained for the new Green Climate Fund must be withdrawn from the banking system, the CO2-related industry, or a public budget. It is likely that the resistance and lobbying against such a redistribution will be strong enough to block the implementation of the original pledges. Thus, what we need is a new and global financial source able to generate at least $100 billion a year, without the imperative of redistributing existing funds.

At the World Future Council, a foundation that promotes policy solutions for our current challenges, we propose the establishment of a financing tool that utilises the International Monetary Fund (IMF) to use an international reserve currency, in the shape of Special Drawing Rights (SDRs), to meet the needs of the new Green Climate Fund.

The IMF has the ability to create new international reserve money in the form of SDRs, its own book-keeping currency. Most independent experts assume that SDRs will play a greater role in the international monetary system in the near future. In April 2009, the G20 Summit authorised the IMF (with its 85% quota majority) to issue new SDRs worth $250 billion to tackle the financial crisis. If the IMF can combat the financial crisis with newly created money, why can’t it respond to the climate threat in the same way?

The IMF member states could agree on the issuance of new SDRs proportionate to their quota shares, and commit to paying most or all of the new SDRs via the new Green Climate Fund (or another agreed funding mechanism) for projects it has approved.

SDRs are not an accepted medium of payment but can be used as currency reserves. Per existing agreements, the IMF can exchange newly created SDRs for the required national currencies, with the respective national banks, which add the SDRs to their reserves.

It should be stressed that the new SDRs are only created and the converted national currencies are only paid according to performance, i.e. for new goods (e.g. wind turbines) and services.

This is done via the Green Climate Fund or another mechanism e.g. IRENA (International Renewable Energy Agency), after the project to be funded has been approved and payment is due. Thus, there is no excess new money resulting in inflationary pressures. The money creation triggered by the Green Climate Fund becomes part of the existing money creation process of our two-step banking system.

The basic principle is that the new money should be paid only against performance. New economic value and new green jobs (new wages and new revenue) would be created in developing countries by using the new money only to pay directly for renewable energy infrastructure projects. One possibility to achieve this is the financing of feed-in tariffs, because money is only paid out if the renewable energy is actually produced.

The advantage of the World Future Council proposal can be summarised as follows: Resources totalling at the $100 billion a year would be immediately available. No country would be required to overstretch its national budget. Given the typical under-utilisation of global production capacities, no significant inflationary impulse is to be anticipated from the new demand.

 

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